3 ETFs to fend off rate hikes

Another 75 basis point rate hike may cause undue stress for bond investors looking to mitigate rate risk. Thematic exchange-traded fund (ETF) provider Global X has three options to help ease the pain.

The Fed reiterated its hawkishness on interest rate policy as inflation continued to climb. Federal Reserve Chairman Jerome Powell confirmed that the central bank would do what it had to do to bring inflation under control.

“If we’re going to set ourselves up, really pave the way for another period of a very strong labor market, we have to put inflation behind us,” Fed Chairman Jerome Powell said. “I wish there was a painless way to do it. There isn’t. What we need to do is drive rates up to the point where we are putting significant downward pressure on inflation, and that’s what we’re doing.

While there are a plethora of options available to hedge against rate hikes, there is an easier solution to consider: Interest Rate Hedging ETF (IRHG). IRHG seeks to provide a hedge against sharp increases in long-term US interest rates and should benefit from this during periods of market stress when interest rate volatility is high. It is an actively managed ETF designed to take advantage of rising long-term interest rates.

According to its fund description, IRHG seeks to achieve its investment objective primarily by investing in interest rate swap options (“swaptions”) and long positions in short-term US Treasury securities. The latter is mainly used for cash management purposes.

For diversification purposes, IRHG may invest in US Treasuries directly or through other ETFs. In summary, IRHG offers investors:

  • Institutional Exposure: IRHG seeks to achieve its investment objective of providing a hedge against a sharp rise in long-term US interest rates by using over-the-counter (OTC) instruments which are generally only available to investors institutional.
  • Tactical Hedging: By holding options designed to take advantage of rising long-term interest rates, IRHG provides access to an effective fixed income hedging strategy designed to offset interest rate risk in a portfolio.
  • Active management: IRHG is an active strategy from the point of view of interest rate risk management.

Get ahead of rate hikes with dividends

Another way is to simply beat inflation at its own game by opting for fixed income options that offer higher yields. One way to do this is to focus on dividend yields rather than other assets like bonds.

Two options to consider that provide dividend income are U.S. Global X SuperDividend ETF (DIV) and the Global X SuperDividend ETF (SDIV). Of the two options, DIV keeps dividends within the safer bounds of US debt, which might be a safer game given the current market uncertainty about a recession.

According to its fund description, DIV seeks to provide investment results that generally correspond to the price and return performance, before fees and expenses, of the Indxx SuperDividend® US Low Volatility Index. The underlying index tracks the performance of 50 equally weighted common stocks, including MLPs and REITs, which rank among the highest dividend yielding equity securities in the United States.

DIV offers investors:

  • High Income Potential: DIV has access to 50 of the highest paying stocks in the United States, which can increase a portfolio’s return.
  • Monthly Distributions: DIV has been making distributions every month for over seven years. With rates set to rise in 2022 around the world, this could mean higher returns.
  • Low Volatility: DIV’s index methodology selects stocks that have exhibited low betas against the S&P 500 to produce low volatility returns.
  • A 30-day SEC yield of 4.80%.

For more adventurous investors wanting to extract additional return instead of more risk, there are options for overseas dividend-paying stocks with SDIV. The fund seeks investment results that generally correspond to the price and yield performance of the Solactive Global SuperDividend Index, which tracks the performance of 100 equally weighted companies that rank among the highest dividend yielding equity securities. high in the world, including in emerging countries.

SDIV features:

  • High Income Potential: Potentially increasing a portfolio’s yield, SDIV accesses 100 of the world’s highest earning stocks.
  • Monthly Distributions: SDIV makes distributions on a monthly basis and has been making distributions every month for over 10 years.
  • Global exposure: Investing in stocks from around the world can help diversify geographic and interest rate exposure.

For more news, insights and strategy, visit the Thematic Investing Channel.

About Catherine Wilson

Check Also

First Trust Tactical High Yield ETF (NASDAQ:HYLS) Sees Sharp Drop in Short-Term Interest

The First Trust Tactical High Yield ETF (NASDAQ:HYLS – Get Rating) saw a sharp decline …